Corporations must help shape a better world – or risk being left behind

Companu 2019

(Floriane Vita, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Elisabeth Andvig, Project Specialist, Partnering Against Corruption Initiative, World Economic Forum


Corporations are powerful actors in society. They have the opportunity to shape the world around them and to influence global agendas. They have a responsibility not just to shareholders, but also to their employees, customers and the general public. Employees are increasingly choosing employers based on social responsibilities, rather than short-term profits, pushing companies to put transparency and accountability at the forefront of their operating principles.

The duty to pursue profit as a CEO is a duty of temporal order, while the pursuit of long-term advantage involves preserving and enhancing the competitive advantage over time, protecting the reputation and lifespan of the enterprise, and considering not just interests of the shareholders, but those of key stakeholders.

 

Legal and societal pressures on businesses operating around the world are rapidly evolving. There is a call for efforts to better align the activities of corporations with society’s drive to build a more inclusive, equitable and sustainable economy. Increasing demand from institutional investors to put funds into sustainable businesses, combined with stakeholder expectations around corporate responsibility, are putting a greater pressure on companies to place environmental, social and governance (ESG) concerns at the centre of their business management. Many governments are struggling to address challenges in today’s globalized world, and citizens are increasingly looking to the larger multinational companies to make use of their untapped potential and resources to fill some of the gaps left by the public sector.

The implementation of the Sustainable Development Goals (SDGs) and Agenda 2030 will depend on positive contributions from the private sector, through responsible business conduct and responsible investments. For companies, a successful implementation of the SDGs will strengthen the enabling environment for doing business and contribute to building stronger markets around the world. Doing the right thing is about more than just complying with the law. However, legal obligations are increasingly requiring companies to act responsibly.

Standards, norms and legislation

A growing web of principles, standards and non-financial reporting guidelines – such as the OECD Guidelines for Multinational Enterprises, the OECD Anti-Bribery Convention, the UN Guiding Principles on Business and Human Rights, the French due diligence law and the UK Modern Slavery Act – set out norms of corporate responsibility. The United States’ Foreign Corrupt Practices Act (FCPA) has for the past two decades been a significant source of corporate and individual liability. The FCPA has created change in business conduct through establishing expectations of corporate due diligence processes and compliance programmes, in addition to imposing liability through enforcement actions. Developments in legislation addressing business and human rights will most likely lead to higher scrutiny of the broader compliance and risk-management strategy of companies.

Taking a holistic approach to implementing respect for human rights and addressing corruption together makes more sense in today’s business environment. Those who take on this more proactive approach will be well positioned to meet new and future regulatory requirements, even if it means going beyond the requirements of current legal frameworks. This might require enhanced collaboration and coordination between business units, in-house teams and functions, including corporate responsibility, procurement, business development and legal, in addition to senior leadership, but breaking down these silos will lead to more sustainable business practice in the long term.

Integrating corruption and human rights risk

Corruption and human rights violations, as seen in the case of cobalt mining in the DRC, are manifestations of many of the same root causes and are often produced by the same conditions in terms of weak institutions, poverty and low levels of development, among other factors, and the risks are mutually reinforcing. Empirical evidence shows that countries with high levels of corruption also often have poor human rights records. Corruption has a negative impact on human rights, and businesses’ responsibility to address potential adverse impacts on human rights requires actively combating corruption. Companies need to think differently about the way they address corruption and human rights in their business operations. Addressing bribes does not completely address the negative impacts of corruption. Corruption creates negative impacts in operating environments that go beyond mere bribes, which businesses need to comprehend and explore ways to deal with.

An infographic outlining the basics of ESG.

An infographic outlining the basics of ESG.
Image: Fernando Arias

Corruption and poor human rights pose similar risks to companies, and multinational companies often operate in regions of the world that are high risk for both corruption and human rights violations. The political risks and the impact that corruption has on values and culture, both internal and external to company operations, is often missing from the picture, and dilutes the more normative goal of fighting corruption as part of corporate responsibility. Contributing to corruption should be viewed as similar to having an adverse impact on human rights. The World Economic Forum, through the Global Battery Alliance, is developing collective action to address challenges in the cobalt supply chain, among others.

Due diligence and risk management

Human rights, social and environmental due diligence can be integrated within existing corporate risk-management systems. Findings from human rights impact assessments can be integrated into internal functions and processes to ensure holistic risk management, giving a more complete picture of the situations in which a company operates. Responsible business conduct should be built into the very core of a company, with rules and values that influence positive behaviour and ethical corporate culture. Through a more holistic approach, companies can meet their responsibilities in a systematic way, be prepared for developments towards mandatory non-financial reporting and immaterial risks and make their compliance programmes more robust. Interconnected strategies on anti-corruption, human rights and sustainability can optimize both the use of resources and the integration and involvement of both internal and external stakeholders.

Many companies have strong compliance programmes addressing corruption already in place. Companies can learn from existing compliance programmes to develop a structured system for managing human rights and corruption impacts in an integrated way. Support from senior management is required to set the tone from the top and make sure the message goes across to all personnel and business partners that responsible business culture and addressing human rights and corruption are priorities to the company.

Effective implementation can be ensured by aligning policy commitment in codes of conduct and contract clauses, integrating procedures such as training, reporting and auditing, and combining risk assessments and due diligence processes, as well as establishing cross-functional working groups within the company to make sure that governance issues are addressed holistically. Each individual company should tailor its compliance with regards to its specific challenges and operating environment. Internally, the company might want to set up working groups with representatives from existing functions such as ethics and compliance, human rights, procurement, safety and operations to work together to ensure a horizontal and holistic integration of these issues.

A new age of ESG

The question of holistic corporate governance is primarily a question about sustainability and social purpose, not just legal compliance. Financial institutions and private investors are increasingly incorporating human rights into the environmental, social and governance standards now influencing investment, adding content to the “S” in ESG. Companies have an interest in improving their track records on human rightsn so as to be ahead of future legislation on the topic, to protect their reputation and image and to attract funding from investors who are increasingly holding companies to account on ESG issues.

Good management of ESG issues is a way for business leaders to build better, more resilient and more valuable enterprises. The S&P Dow Jones Indices recently stated that it will launch an environmental, social and governance version of its S&P 500 Index in an effort to meet increased investor demand for impact-investment products. The new index will exclude tobacco producers, certain weapons producers and companies with a low score with the United Nations Global Compact’s principles for responsible businesses. The UN Principles for Responsible Investment currently has over 1,000 signatories, including asset owners, investment managers and professional service partners, who make efforts to integrate ESG factors into investment practice. The World Economic Forum’s Future of Sustainable and Impact Investing also explores various perspectives with regards to ESG management, notably how to build an effective ecosystem for ESG management, in addition to a separate workstream the Forum has on Climate Governance and Finance.

SDG 16 calls for “peace, justice and strong institutions”, and specifically calls for a substantial reduction of “corruption and bribery in all their forms”. The link with the broader sustainability and human rights objectives of the remaining goals cannot be treated separately. The SDG project calls upon the private sector specifically to contribute to the implementation of its vision, and companies are increasingly integrating the content of the goals in their long-term business strategies. Companies committing to the implementation of anti-bribery and corruption policies and practices, together with preventing and mitigating human rights impacts and addressing sustainability more broadly, will find themselves in a better position to contribute to the SDGs.

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